Take back USEC, House panel told
By Joe Walker
april 14, 2000
Photo provided by Rep. Ed Whitfield's office--Defends stock offering: William ‘Nick’ Timbers, USEC chief executive officer, testifies Thursday.
WASHINGTON--The uranium enrichment company that operates the Paducah Gaseous Diffusion Plant must be returned to a government-owned corporation if the business is to survive, three expert witnesses testified Thursday in a House subcommittee hearing.
Joseph Stiglitz, former chairman of the World Bank; Shelby Brewer, former undersecretary of energy in charge of enrichment; and Richard Miller, policy analyst for the atomic workers' union, all said a government-owned corporation is the best solution to the financial troubles of USEC Inc. USEC, which operates the Paducah plant and its sister facility near Portsmouth, Ohio, has floundered since it went from being government-owned to a private firm two years ago, they said.
And another witness told the subcommittee that the 350-employee Honeywell plant in Metropolis, Ill., which produces uranium hexafluoride, or UF6, for the two plants, could also close within three years if the government does not intervene.
Miller, who stressed that if USEC goes bankrupt the government is required to cover its debt, predicted both USEC plants will be shut down unless USEC rights itself and finds a replacement for outdated gaseous diffusion technology. USEC scrapped a long-promising laser technology called AVLIS a year ago because it was too expensive and not commercially viable.
"It's more likely than not that both gaseous diffusion plants will be shut down before any new enrichment technology is deployed in this country," Miller said.
Two other witnesses, representing parts of the nuclear fuel cycle, said government intervention is needed to keep their respective parts of the industry from dying.
One part of the cycle is the Honeywell plant, which could close because of sales lost through USEC privatization, said James Graham, president and chief executive officer of ConverDyn, the Metropolis plant's marketing firm.
Thursday's testimony ended a four-hour hearing marked with insinuations by some U.S. representatives that USEC Inc. Chief Executive Officer William "Nick" Timbers' motive was personal gain in ramrodding the privatization of his firm through a $1.9 billion stock sale. Timbers, who said he earned $600,000 last year and a similar amount in stock, said the public stock offering was a carefully made board decision, not his alone.
First District U.S. Rep. Ed Whitfield, R-Hopkinsville, chaired the hearing before the House Commerce Committee's Oversight and Investigations Subcommittee, of which he is a member. Whitfield and his counterpart, Rep. Ted Strickland, D-Ohio, sought the hearing to explore USEC's financial woes.
Graham and the four other witnesses provided a variety of business- and labor-related views regarding USEC's predicament. The firm now has about 40,000 investors, and its stock has plummeted nearly 70 percent since privatization. USEC also is taking dramatic cost-cutting measures, notably eliminating 850 jobs at the enrichment plants starting in July.
USEC has already paid Russia $13 billion for uranium made from the equivalent of 3,254 nuclear warheads. Although ConverDyn supports nuclear disarmament, the deal is flooding the U.S. market with nearly as much UF6 as the Metropolis plant can make in a year, Graham said.
He added that because of its financial trouble, USEC is aggressively selling its stockpile of natural uranium given by the federal government as part of privatization. That has caused prices for the Metropolis plant's work — converting natural uranium to UF6 — to plummet and its market share to drop 40 percent, Graham said.
"USEC denies its role in this impact, but its own public records support the stated facts," he said. "Importantly, if ConverDyn were to shut down, USEC's enrichment facilities would be placed in peril due to shortage of feed material that ConverDyn produces."
The Paducah and Portsmouth plants, which enrich raw UF6 by increasing the isotope useful in nuclear fuel, are in big financial trouble.
On Monday, Bank of New York Capital Investments, which is marketing bonds to cover $500 million in debt incurred when USEC went public, released a report saying it expects the firm to announce by late summer that it will close one of the plants by July 2001.
Timbers testified that in the 22 months since privatization, USEC has seen drops in prices and demand from 12 percent to 18 percent, but costs have risen dramatically. Electricity is 55 percent of production costs, and summer power prices tripled at Paducah, he said.
USEC has been forced to slash production, which has led to higher unit production costs. The "triple whammy" of fewer sales, reduced revenue and greatly increased costs prompted a need for extreme measures, such as slashing the work force, he said.
When USEC was privatized, it received $1 billion in stockpiled uranium from the government. It now is selling the uranium to improve cash flow. Although USEC is committed to limiting those sales, it also has an obligation to improve stock value, Timbers said.
Brewer, a Reagan-era undersecretary of energy who helped make the plants more businesslike, said USEC's financial situation is grave and needs aggressive attention. He recommended removing national security and diplomacy roles from USEC; having DOE or the Department of Defense reclaim control over one enrichment plant and place it in "hot standby"; compute any losses in the Soviet deal and pay USEC shareholders if needed; and encourage stock owners to look at merger or divestment with another enrichment supplier or nuclear fuel cycle operator.
Besides cutting workers and considering a plant closure, USEC is trying to lower its prices for electricity and Russian uranium, as well as diversify. Brewer endorsed those moves but said they probably won't be enough to save the company. He said USEC lacks the cash, credit and management credibility to make acquisitions.
Selling uranium stockpiles "is like living on principal rather than earnings," Brewer testified, and plant production costs are now $20 per unit higher than USEC's goal of $75. USEC world market share has declined from 70 percent to 40 percent, and domestic share has dropped from 90 percent to 75 percent, he said.
"What concerns me most is the trend toward an ultimate (cash-flow) problem, a short step away from bankruptcy," Brewer said.
USEC tried and failed late last year to get federal subsidies, and threatened to pull out of the unprofitable Russian deal. Brewer called that complaint "a red herring" because USEC negotiated the deal, and it actually helps the company with cheaper uranium when plant power costs are rising.
"For USEC to come to Capitol Hill with a tin cup, pleading for a subsidy, is disingenuous," Brewer added. "The Soviet deal cannot be used as a crutch to excuse poor management."
He also criticized USEC management for assuming the $500 million debt as part of an initial public stock offering in July 1998. Although the debt added value to the sale for the Treasury, it was a "trump" card to make the offering appear more valuable than selling USEC to another company, Brewer said.
Stiglitz, former chairman of the President's Council on Economic Advisers, said he opposed USEC's privatization because it makes no economic sense and especially because the firm had a "conflict of interest" as agent for the uranium from Russia, one of four USEC competitors. He accused USEC management of paying "hush money" to keep the Russian agreement quiet in its early years. Despite promises not to deter the flow of Russian uranium, the company secretly declined offers to buy more of the material, Stiglitz said.